Looming risk in Sri Lanka’s rising foreign commercial loans

April 4, 2007 (LBO) – Increased reliance on foreign currency loans by Sri Lanka’s government and private sector could spell danger ahead if they are not managed properly, the Central Bank has said in its annual report. High foreign non-concessional borrowings could increase the vulnerability of the external sector to various shocks, the bank warned in its annual report for 2006.

Hence, to minimise these macroeconomic implications, a proper balance has to be maintained in the borrowing mix to finance the budget deficit.

Borrowing from domestic sources to finance the budget deficit has the problem of crowding out private investment and creating inflationary pressures in the economy.

Commercial Rise

The share of foreign concessional had 92.4 per cent of total total foreign debt in 2006 from 96.1 per cent in 2005 with the rise in commercial borrowings.

Foreign currency denominated domestic debt of the government, taken mainly from banks, increased to 145 billion rupees (1,359million US dollars) in 2006 from 98.5 billion rupees (965 million US dollars) in 2005.

Loans from offshore banking units made up 83 billion rupees (779 million US dollars) of the total and Sri Lanka D